The “tug of war” stalemate in US equities could soon be broken as the odds rise of an imminent market pullback, according to Charles Schwab.
Kully Samra, managing director of Charles Schwab UK, said the S&P 500 index had been engaged in a “tug of war” between conflicting economic factors and had experienced only marginal gains and losses year to date.
But he said there were a number of factors stacking up in favour of an imminent market pullback
“Given the somewhat extended valuations, numerous risk factors such as the Greek debt situation… and the extended period since the last official correction in equities, we believe correction risk is still present in the near term,” he said.
Although many investors are dreading such a correction, Mr Samra said his team “believes such a move would be healthy and [is] set up for the bulls to re-establish their dominance”.
Mr Samra said sentiment in the US market was being heavily affected by what was going on internationally, such as Greece’s debt problems and the attention surrounding German government bonds, which sold off heavily in recent months.
But he said the major potential trigger for a market pullback would be if the US Federal Reserve (Fed) decided to raise interest rates from their current record lows, which the economist predicted would happen later this year on the back of stronger-than-expected employment data.
“US economic activity has rebounded a bit in the second quarter and we expect that to continue,” he said.
“The job market continues to be a highlight, with jobless claims running near historic lows. The Bureau of Labor Statistics reports another 280,000 jobs were added in May.”
The combination of these factors “place us firmly in the sooner-rather-than-later camp of raising rates, [which is] likely [to happen] in September,” he added.
This view is at odds with both the International Monetary Fund and the World Bank, which have urged the Fed to hold off raising rates until 2016. However, Mr Samra argues a rate rise should be viewed as a positive.
“We believe it would help return the investing world to a more normal environment and aid savers, especially those nearing retirement who have had to venture out the risk spectrum for yield.”
He added that investors should not fear further rate rises, as the Fed had communicated the move will be “very cautious and data dependent in an effort not to short-circuit the economic expansion”.
